Infosys – Golden Parachute or Hush Money?

Despite vehement denials, Infosys is unable to shake off doubts on the severance packages given to 2 key executives

Despite vehement denials, Infosys is unable to shake off doubts on the severance packages given to 2 key executives

[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]T[/dropcap]he founders of Infosys and other eminent ex-Infosians have raised several governance issues pertaining to transparency, fiduciary duty and shareholder value at India’s premier IT Company. While being supportive of management, they have questioned the Board of Directors especially the Compensation Committee and Independent Directors on matters pertaining to critical issues that have been simmering for a while now. Excoriating some of the vital decisions taken by the Board, they have concluded that it does not meet the high standards of Corporate Governance of the past at the iconic and much envied Corporation.

Was the golden parachute awarded to the two executives’ hush money?

Credit is certainly due to Mr. Narayana Murthy and other reputed ex-Infosians for publicly questioning the serious lapses of the Board and Independent Directors especially on the 50% pay increase to CEO and severance packages paid to two employees. While Mr. Rajiv Bansal, a long term employee of the company, was elevated to the CFO position by Mr. Murthy himself, Mr. David Kennedy was hired in 2014 by Mr. Vishal Sikka after he took over the reins at Infosys.

The sudden departure of both these executives with golden parachutes caused ripples in corporate India. Like one ex-Infosian put it “It is unheard of in the history of India Inc. that executives can get such exorbitant severance package”. The Board’s claim that it was standard industry practice to pay executives who are privy to competitive information did not cut much ice with either the founders or major shareholders. On the contrary, as Mr. Murthy eloquently clarified, several senior executives and Board members have left Infosys but none received a severance package.

Was the golden parachute awarded to the two executives’ hush money? The needle of suspicion indeed points it to being hush money to remain tight lipped about possible potential legal hassles and erroneous customer billings in the United States.

[dropcap color=”#008040″ boxed=”yes” boxed_radius=”8px” class=”” id=””]I[/dropcap]ndian IT industry witnessed hyper growth for over a decade and a half with most of the revenue being churned out of the financial sector in the United States. That boom ended with the infamous 2008 financial crisis. With increased scrutiny of many of the practices of IT Industry, regulators and law enforcement have pounced on a number of violations. Top Indian companies have paid hefty fines to customers, settled class action law suits and disclosed FCPA violations just in the past few years.

…it is open secret that billing practices in the IT industry are notoriously opaque and plagued with errors and irregularities.

Infosys’ tryst with US regulators has been well documented and reported. Infosys has had run ins in the past with US immigration rules and has been accused of unlawfully using B-1 visa holders to perform skilled labor in order to fill positions in the U.S. for employment that would otherwise be performed by U.S. citizens or require legitimate H-1B visa holders. These violations have a significant bearing on customer contracts as most customer contracts include a covenant (and penalties for breach) that Infosys will comply with relevant regulations of the United States and not cause harm to its client or customer.

Equally, it is open secret that billing practices in the IT industry are notoriously opaque and plagued with errors and irregularities. At the same time, customers have demanded and obtained favorable billing terms including outcome based billing, milestone payments and discounts for quality, delays etc. Customers frequently require vendors to input time in the customers billing system and this has caused headaches for software companies. The perennial reconciliation between billing using customer ‘approved’ hours and hours charged in the software entity’s system is fraught with errors, judgments and padding of hours and employee time.

The double whammy of alleged violation of immigration (and labor) laws in the United States coupled with dubious billing practices (padding of invoices, on site v. off shore resource) arguably led to hush money towards the ex-CFO and ex-General Counsel who very well could have approved, participated or at least have credible information about these practices at Infosys.

The Infosys Board continues to tread lightly on questions raised by important shareholders and founders rather than come clean and be transparent. Instead of providing answers, the Board has appointed Cyril Amarchand Mangaldas to make recommendations to Directors on various issues and as one Independent Director put it “to open communication channel to deal with the issues raised by founders”. But the Board Chairman and Directors have to be reminded of the old adage inside the Potomac beltway that “It’s not the Crime. It’s the Cover-up”. It is better to come clean on the severance packages and other governance issues raised by founders and various shareholders than launch a cover-up by appointing a law firm.Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.

N. V. Krishnakumar is an investor and ardent follower of economic and political developments in India and United States. After graduating from New York University’s Robert F. Wagner Graduate School of Public Service with a Masters in Public Finance and Policy, he returned to his hometown of Bengaluru. He is active politically and engages in civic activities.